Tuesday, 14 February 2012

Congratulations on being elected President and CEO of CSC and our best wishes for every success.

As you get in-depth briefings and advice from Messrs Laphen, Mancuso and Chase, bear in mind that they carry more responsibility for CSC’s difficulties today than anybody else.And if you follow their advice you will probably achieve the same result as they did, meaning abject failure. So we’d like to give you our advice based solely on our desire to see CSC succeed once more.

·Position your arrival as a major change in direction, culture and approach for CSC, not as an evolution or some form of continuity with the past.Harness the employees’ frustrations with the management style of the past 5 years to get their commitment and buy in to your vision of CSC.

·Set a clear strategic direction, communicate it then get the organization behind it.If CSC has had a direction over the past 5 years it is a well kept secret. Boosting this quarter’s earnings or plugging the hole in this quarter’s profit is not a strategic direction.

·Decide in which areas CSC will be world leader and make the investments to support thosedecisions. CSC was recognized as a world leader in selected domains 10 years ago.Today it is viewed as a “me too” player.It has missed many market changes and opportunities in the past years due to its obsession with maximizing this quarter’s earnings at the expense of everything else, including investments in the future.

·Put the client, his business needs and the CSC solution to these needs back at thecenter of the management agenda. CSC has lost this. Internal debates, administration, cost cutting, inspection of 'numbers', organization models etc dominate the management agenda today which means the customer comes last and the employees nowhere.

·Decide your organizational and operating model and give senior executives the option of implementing it fully or leaving the company.CSC has been going round and round this topic, especially in Europe, for years.In theory there is one global organization per the Corporate model, but in reality there are local fiefdoms run by powerful barons. CSC must behave as one global organization, not as a franchise operation.

·Put small company values back into CSC, which used to be a large company with the positive values of a small company. It was nimble, it could take decisions quickly. It could quickly deploy a top-class team of experts from all over the world to address a client opportunity. It could swiftly bring together executives of all levels, from technical expert to CEO, to address urgent client matters and take decisions while the competition was standing still. Today, CSC stands still, a small company with a heavy bureaucratic decision making process, (or often an “absence of decision” making process) while nimbler competitors thrive.

·Change the “Tone at the Top” .This phrase was used to describe the change needed in management attitudes in Nordic. But the most important and most needed change in the “tone at the top” is at the very top levels of CSC, to bring reality into line with the values the company claims to espouse.

Why did no “whistle blower “ feel comfortable enough to warn CSC Corporate that they suspected something unusual was happening in Nordic when the irregularities started long before they reached the $100million?Did Messrs Laphenor Mancuso ever ask themselves that question? Did they try to find out how other employees’ concerns, or allegations of inappropriate management behavior or actions had been handled in the past?Did they ever try to see if there was a correlation between employees making complaints and leaving the company soon afterwards?

CSC should have one common set of behavioral standards, and the example must come from the top. Credibility in management is destroyed when the executive decision makers grant exceptions from their own rules for themselves.

Stop “killing the messengers” who try to raise issues or bad news.This approach never solves the problem, it just encourages people to hide things from the management. If you can persuade employees to discuss their problems openly with you and your executive team you will have made a big step forward. Today many, many employees feel that “keeping their heads down” is their safest and best option.

Get back to treating all employees with respect, including (or especially) those you must terminate.

·Introduce a CSC website that reflects your vision and ambitions for CSC. After all, the website is the company’s window onto the world. The current website has no sparkle, no excitement and does not make the reader want to look inside it. It is the website you would expect from an administrative organization. In that respect it reflects well what CSC is today. Make it represent the CSC you want in 2017.

We would like to repeat our best wishes for success. The value of our holding in CSC over the past 18 months reminds us that we have got literally thousands of reasons to want to see a successful and thriving CSC.

Sunday, 12 February 2012

CSC filed its employment agreement with Mike Lawrie as President and CEO with the SEC on 8 February. Here are the headlines of his compensation package:

·His employment contract is for 5 years.

·His base salary is US$1,250,000 pa, to be reviewed annually

·His on-target annual bonus is 150% of his base salary ($1,875,000) with a maximum of 300% of base salary ($3,750,000).

·Grant of Long Term Stock Options for shares with a value equivalent to 280% of his base salary. This means that for the year beginning 1 April 2012 (CSC’s FY2013) the value of the shares covered by the option agreement will be $3,500,000.

·Grant of Performance Share Units with a value equivalent to 420% of his base salary. Thus for FY2013 the value of the shares covered by the Performance Share Units agreement will be $5,250,000.

·Grant of Time Vesting Inducement Restricted Stock Options (ie “Golden Hello part 1 ”)of 200,000 shares vesting evenly over 4 years. At a current price of $30 per share the value of the shares covered by this agreement would be $6,000,000.

·Grant of Performance Vesting Inducement Restricted Stock Options (ie “Golden Hello part 2 “) of up to 200,000 shares. These options will vest based upon the increase in CSC’s share price over the coming 5 years. The maximum award would vest in the event of a share price increase of 80% over its current price. With a current price of $30 per share the value of the shares covered by this agreement would be up to $6,000,000.

·An annual grant of an unspecified number of Career Shares,

·Benefit Programs such as pension and other perks.

·Various provisions regarding termination of employment, change of control of CSC , confidentiality agreements, indemnification in case of litigation or claims against him in his role as CEO of CSC etc.

It is a rich package. However, Mike Lawrie is taking on the challenge of turning round CSC from the road to oblivion that Mike Laphen has driven it down.If Lawrie succeeds, his compensation and rewards will be good value for both shareholders and employees.

The Board of Directors who have selected Mike Lawrie as CEO and approved this compensation package also selected Mike Laphen as CEO and then designed his compensation package.Laphen’s failure as CEO was foreseeable in view of his management style. His compensation package was flawed in that he earned significant “performance awards” in bonus and stock options despite major shortfalls against targets. This led to his earning $15.5million in FY2010 and $12.5million in FY2011 while investors lost money and employees lost their jobs. More details are in our blog posting of 30 June 2011 “CSC’s idea of pay for performance“.

We trust the CSC Board of Directors has learned the lessons of their errors regarding Mike Laphen. We hope they will ensure Mike Lawrie is well compensated for success, but there will no longer be massive rewards for CEO failure.

The earnings call was what we have come to expect from CSC. There were lots of confusing explanations about what the results would have been “without this impact and excluding that item” .

The results in themselves were mixed. There was a welcome increase in new business wins and good cash flow performance, but a year-on-year revenue decline.CSC’s margin performance, excluding the NHS and goodwill impairment, improved compared to the recent past. However, this cannot be taken as good news without understanding how it was achieved. CSC watchers are now painfully aware that many of the cost reductions which CEO Mike Laphen announced from 2008 onwards were in fact cuts in vital investments for the future.

CSC announced EPS (excluding the NHS write off and goodwill impairment), of $1.35 per share, compared to the latest analysts’ consensus of $0. 58. It looks good on the surface. However, $0.80 of the $1.35 EPS comes from a tax credit (sounds familiar??). Without this tax credit the EPS would have been $0.55 or just below the latest consensus and well below the consensus of 90 days ago.

The good news in the announcement was the absence of any more major shocks. There was a further goodwill write-off of $60million in Healthcare but this is minor compared to the $2.7billion goodwill write-off in Q2 FY2012 and the $1.5billion NHS write-off announced at the end of December.CSC says it has now written off all the goodwill relating to the Healthcare sector, but that there has been no write off of goodwill arising from the recent iSoft acquisition, It will be interesting to see if this is still the case in 12 months time.

The really good news for shareholders is that this was Mike Laphen’s last earnings call and that CFO Mike Mancuso is expecting to leave CSC in 3 months. We wonder how much of the 20% stock price increase is due to their departures and the nomination of Mike Lawrie as the new President and CEO.

We hope Mike Lawrie can quickly re-establish CSC’s credibility with the analyst and investor communities. CSC has declined to give any Q4 FY2012 earnings guidance. This is sensible.Mike Laphen’s habit of handing out unattainable financial targets to executives is well known within CSC.Mike Lawrie has inherited enough problems without also having to deal with any unattainable Q4 profit expectations set by his predecessor.